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Zale (NYSE:ZLC)

Q4 2011 Earnings Call

August 31, 2011 9:00 am ET

Executives

Theo Killion - Chief Executive Officer, President and Director

Matthew Appel - Chief Administrative Officer, Chief Financial Officer and Executive Vice President

Roxane Barry - Director of Investor Relations

Analysts

Rick Patel - BofA Merrill Lynch

David Wu - Global Crown

Jeffrey Stein - Ticonderoga Securities LLC

Janet Kloppenburg - JJK Research

Operator

Good morning. My name is Nicole, and I will be your conference operator today. I would like to welcome everyone to Zale Corporation Fourth Quarter Fiscal 2011 Results Conference Call. [Operator Instructions] I would now like to turn the call over to Roxane Barry, Director of Investor Relations. Please go ahead.

Roxane Barry

Thanks, Nicole. Good morning, and thank you for joining us in the Zale Corporation Fourth Quarter Fiscal 2011 Conference Call. I'm Roxane Barry, Director of Investor Relations. On the call today are Theo Killion, Chief Executive Officer; and Matt Appel, Chief Administrative Officer and Chief Financial Officer.

Before we begin, I'll read our Safe Harbor statement. Our commentary and responses to your questions on this conference call will contain forward-looking statements, including statements relating to our future goals, plans and objectives. These forward-looking statements are not guarantees of future performance, and a variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in these forward-looking statements. Some of these factors that could cause actual results to differ materially from those contained in the forward-looking statements is available in our quarterly report on Form 10-Q for the fiscal quarter ended April 30, 2011.

Also please note that during this conference call, we will discuss certain non-GAAP financial measures as we review the company's performance. One of these non-GAAP measures is adjusted EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization adjusted to exclude charges related to store closures. We use this measurement as part of our evaluation of the performance of the company. In addition, we believe this measure provides useful information to investors. Please refer to the Financial's drop-down within our Investor Relations section on our website for a reconciliation of this non-GAAP measure to the most comparable GAAP financial measure.

I'll now turn the call over to Matt.

Matthew Appel

Thank you, Roxane, and good morning, everyone. Let me apologize in advance for the quality of my voice. I'll try to speak more slowly so that everybody can understand what I'm saying.

I'm going to begin by discussing our results for the fourth quarter and full year. Revenues for the quarter ended July 31, 2011 are $377 million, an increase of $32 million or 9.4% compared to $345 million for the same period in the prior year.

For the year ended July 31, 2011, revenues were $1.74 billion, an increase of 7.8% compared to $1.62 billion for 2010. The increase in revenues for both the fourth quarter and full year is primarily due to higher same-store sales and increase in revenues recognized on our warranty products and appreciation of the Canadian dollar, partially offset by revenues attributable to year-over-year store closures.

Comparable store sales for the fourth quarter increased 9.8% compared to a decrease of 2.1% in the prior year. The increase in comparable store sales reflects a 4% increase in the number of customer transactions as well as a 7% increase in average transaction price in our fine jewelry stores.

At constant exchange rates, which exclude the effect of Canadian currency translation, comparable store sales increased 8.4% for the quarter. For the year ended July 31, 2011, comparable store sales increased 8.1% compared to a decrease of 6.6% in fiscal year 2010. The increase in comparable store sales for the full year reflects a 3% increase in the number of customer transactions, along with a 6% increase in average transaction price in our fine jewelry stores. At constant exchange rates, comparable store sales increased 7.1% for the year.

During the fourth quarter, the Canadian dollar strengthened approximately 8% relative to the U.S. dollar with an average exchange rate of $1.03 compared to $0.96 in the prior-year quarter. The impact on the 2011 quarter's earnings was not significant as the rate differential almost equally impacted all P&L line items.

Appreciation of the Canadian dollar also impacted the full year. The Canadian dollar average exchange rate was $1.01 for 2011. In 2010, the Canadian dollar exchange rate averaged $0.95. Therefore, year-over-year, the Canadian dollar was approximately 6% stronger. Similar to the impact on the quarter, year-over-year impact on earnings was not significant.

Despite the significant increase in commodity costs, we achieved gross margin for the quarter ended July 31, 2011, of 51.3%, our highest individual quarterly result of fiscal year 2011. This compares to 52.7% for the prior-year period. The 140 basis point differential in gross margin is attributable to higher merchandise costs, which is exemplified by a $5 million year-over-year increase in last in, first out, or LIFO inventory charges, offset by higher margin performance on our warranty products and a lower level of markdowns associated with our improved inventory quality.

Excluding LIFO inventory charges of $7.9 million and $2.9 million for the quarters ended July 31, 2011, and July 31, 2010, respectively, gross margin would have been 53.4% and 53.5% for the 2011 and 2010 quarters.

I want to stress that our gross margin performance for the quarter was largely achieved without the benefit of the bulk of our price increases. While we began taking certain price increases early in the third quarter, the majority were implemented during the month of July.

For the year ended July 31, 2011, gross margin was 50.5% compared to 50.4% in fiscal year 2010. For the full year, higher margin performance on warranty products and lower inventory valuation charges, resulting from the year-over-year improvement in inventory quality, was offset by higher merchandise cost including an $11 million increase in LIFO inventory charges.

The unprecedented increases in raw material costs continue to be an area of significant focus. Over the past year, our diamond costs are up over 20%; gold is up over 35%; and silver is up over 120%. A good portion of these increases occurred over the second half of our fiscal year.

As our businesses improved during the year, we have grown more confident that the decisions made about our assortment were resonating with our guests. Accordingly, in response to the pressures imposed by the commodity cost environment and after completion of thorough testing, we implemented price increases across our brands. While we won't be disclosing the level or extent of price increases for competitive reasons, rest assured that they were meaningful.

Our focus is and will remain clearly on the merchandise margin comp performance of the business. For example, fourth quarter merchandise margin comp was a very healthy 10.1%. And we intend to maintain overall margin above 50% and gain market share. We believe these goals are realistic and achievable.

Demonstrating the increasing leverage the top line growth is bringing, SG&A expenses for the quarter were $204 million or 54.1% of revenues as compared to $197 million or 57% of revenues in the fiscal 2010 period. During the fourth quarter, we continue to make investments in SG&A that are focused on improving our business. These investments include: field and corporate talent upgrades, staffing levels and performance-based compensation earned by our field organization and increased marketing spend for Mother's Day TV.

SG&A expenses for the year ended July 31, 2011, were $860 million or 49.3% of revenues as compared to $846 million or 52.4% of revenues fiscal 2010. The $14 million increase was primarily due to the following factors: increases in field staffing levels with performance-based compensation; credit card fees -- and credit card fees, primarily due to increased sales in the United States, partially offset by the city minimum volume fee paid in the fourth quarter of 2010; decreases in professional fees; and lower rent, due primarily to lower store count.

For the fourth quarter of 2011, we posted an operating loss, $24 million, compared to an operating loss of $31 million in the prior year period, representing an improvement of $7 million.

For the quarter, operating margin grew 270 basis points year-over-year. For fiscal 2011, we posted an $87 million improvement in operating loss to $28 million, compared to $115 million in the prior fiscal year. As a result, operating margin improved 550 basis points in the year.

Demonstrating the magnitude of the improvement in our business, trailing 12-month EBITDA adjusted for charges related to store closures now stands at positive $14 million compared to negative $55 million 1 year ago, an improvement of $69 million.

Interest expense for the fourth quarter of 2011 was $9.2 million compared to $9.7 million in the prior year, an improvement of $0.5 million. For the year ended July 31, 2011, interest expense was $82.6 million compared to $15.7 million in fiscal 2010. The increase of $67 million from the prior year is primarily due to the charge of $46 million associated with the first amendment to our senior secured term loan, which was recorded in the first quarter 2011; $16.2 million related to interest for the senior secured term loan, which we closed during the fourth quarter of fiscal 2010; and an increase in the interest rate and commitment fees on our revolving credit agreement that resulted from the amendment of this agreement during the fourth quarter of 2010.

Moving to income taxes. In the fourth quarter, we recorded an income tax benefit of $1 million compared to a benefit of $6 million in the comparable period last year. The 2010 quarter included a $4 million tax benefit related to net operating loss carrybacks pursuant to the Business Assistance Act of 2009. The company does not foresee any further benefits from this act.

For fiscal year 2011, we incurred income tax expense of $2 million compared to a benefit of $29 million in fiscal 2010. The fiscal year 2010 benefit is also primarily a result of tax benefits related to net operating loss carrybacks pursuant to the Business Assistance Act of 2009.

Loss from continuing operations for the quarter ended July 31, 2011, was $33 million or $1.02 per share. In the prior year quarter, loss from continuing operations was $29 million or $0.89 per share. The 2010 quarter included a onetime gain of $7 million net of issuance costs related to the decrease in fair value of the warrants issued pursuant to the senior secured term loan.

Loss from continuing operations for the year ended July 31, 2011, was $112 million or $3.49 per share compared to a loss from continuing operations of $96 million or $2.99 per share for the year ended July 31, 2010.

Net loss from continuing operations for fiscal 2011 was $16 million higher than 2010 primarily due to the nonrecurring interest charge of $46 million in the first quarter of 2011, which resulted from first amendment of the senior secured term loan that I mentioned earlier and the nonrecurring gains of $7 million recognized in the fourth quarter related to the warrants, which I discussed. And these are partially offset by a net decrease of $26 million in store impairments and closed-store charges.

We ended the fiscal year with 1,163 fine jewelry stores and 666 kiosks for a total of 1,829 retail locations, compared to 1,218 fine jewelry stores and 672 kiosks for a total of 1,890 locations at the end of the prior year. During the fourth quarter of 2011, we closed 10 fine jewelry stores and 7 kiosks.

Our expectation continues to be that we will selectively open stores where the opportunity is compelling and close stores that are underperforming if the economics makes sense. In fiscal 2012, we currently plan to close approximately 20 fine jewelry stores and 5 kiosks.

Now let's turn to the balance sheet. Inventory at July 31, 2011, stood at $721 million compared to $703 million at the end of the prior year fourth quarter. The year-over-year increase is due to the impact of higher commodity cost on our inventory; additional merchandise or just to fuel the higher level of sales activity; and the impact of the higher Canadian exchange rate, net of inventory related to closed stores.

I would like to take a moment to thank our vendor partners, who have loyally supported us throughout our turnaround. We sincerely appreciate the spirit of partnership we have been afforded by this community.

As of July 31, 2011, the company had total outstanding debt of $395 million compared to $317 million as of July 31, 2010. The outstanding debt of $317 million, as of July 31, 2010, excludes a $21 million discount associated with the warrants issued in connection with our term loan that was charged to interest expense during the first quarter of fiscal year 2011.

In addition to the term loan of $140 million, long-term debt as of July 31, 2011, included $255 million borrowed under the revolving credit facility. Total available borrowing capacity as of July 31, 2011, stood at approximately $161 million and was aided by higher rates in the most recently completed appraisal.

During the fourth quarter of 2011, capital expenditures totaled $7 million, bringing fiscal year 2011 capital expenditures to $15 million, which is flat with fiscal 2010. We anticipate investing up to $30 million in capital expenditures in fiscal year 2012, primarily on stores and improvements on our IT infrastructure.

I would now like to highlight 2 areas of continued focus to improve the pace of our business recovery. These areas are warranty and merchandise repair. During fiscal 2011, after a careful review of the competitive environment, we implemented 2 price increases. One early in the year and one towards the end of the year on our warranty products.

Recently, we extended coverage to additional categories of merchandise under our lifetime program and initiated a new 12-month program on another category of merchandise not previously included in the program.

Of particular note are the strength of warranty sales in our kiosk business. In fiscal 2011, we sold $10 million of 1-year warranties in a program that we began in the first quarter of fiscal 2010.

In the area of merchandise repair, our focus is on improving the guest experience. We are rationalizing our delivery network to fine-tune the timing and quality of our repair work. We know that improving our repair capabilities drives additional traffic to our stores. In addition, in July, we implemented a comprehensive price increase for our repair services.

At the end of April, we announced an agreement with the Canadian AIR MILES Reward Program to participate as the exclusive sponsor in the fine jewelry category. We began issuing reward miles in Ontario in mid-May and rolled the program out throughout Canada on August 1.

Based on early launch data, we believe that the program has been successful in generating incremental sales volumes at both Peoples and Mappins. In stores where AIR MILES were offered, 50% of the transactions were associated with AIR MILE collectors. We're excited to participate in this program that offers our guests great value and differentiates us from our competitors.

In June, we announced that the company had rejoined the Russell 3000 Index, which meant automatic inclusion in the Russell 2000 and Russell Global Indices. Membership is based primarily on market capitalization rankings. Our inclusion has led to a higher level of awareness with investors as the Russell Indices are widely used by investment managers and institutional investors for index funds and as benchmarks for both passive and active investment strategies.

Earlier today, we announced an exciting new U.S. credit program. The program provides our U.S. customers with financing options that are additive to our current U.S. credit card program. Select customers, whose credit applications have been declined by Citi, will be offered credit under this program, providing them with an affordable option to finance merchandise.

Monterey Financial Services, a nationally recognized consumer finance company serving the retail community, recently became our first partner in this program. This new offering is available in all Zales, Zales Outlet and Gordon stores effective immediately. Ken Brumfield, our Vice President of Financial Products and his team of experts, have been instrumental in initiating this program.

Let me conclude by saying that we have made significant progress in the first year of our multiyear turnaround strategy. Despite significant headwinds in commodity markets and the overall global economy, our financial performance has improved and our gross margin has been strong. With the strong foundation that we have put in place over the past year and a half, we are now better positioned to achieve our #1 goal of returning the business to profitability.

I would now like to turn the call over to Theo.

Theo Killion

Good morning, and thank you, Matt. I'm going to focus my comments on the total fiscal year in order to provide context for the quarterly results that Matt just reviewed and to give insight into our preparations for fiscal 2012.

As a team, we began fiscal 2011 with an objective of stabilizing the business and getting back in the game. After several consecutive years of poor performance, our financial stability was damaged; our assortment lacked integrity; investors lost confidence; and most importantly, our guests were disappointed. What wasn't damaged, however, was the spirit, determination, focus and pride that our team has in the Zale family of brands.

Our objectives were designed to create a path of profitability by: fixing the poor assortment and returning it to at least 80% of our product mix; by offering a price-value proposition that recognizes the economic pressure on our guests; by creating a compelling message that supports our core assortment, celebrates our guests and reclaims our heritage at Peoples and Zales as the diamond store; by investing in our people, particularly in the field; and by improving focus and accountability for all of our brands.

As we look back on the year, I'm pleased to say that we've made improvements in each of these objectives. We are currently at 80% core, and importantly, each of the wedding categories: bridal, anniversary bands, men's and solitaire's all delivered double-digit comp increases for the year. Additionally, all of our brands were comp positive led by Peoples and Outlet. As we made progress in rebuilding the core, we also began to look for strategic partnerships in order to develop proprietary brands.

One of these searches was for a brand that would add an emotional halo to our wedding business. We wanted to partner with someone who was instantaneously recognizable, whose name was synonymous with bridal and who had a highly developed design aesthetic. In our view, there really was only 1 candidate. On August 11, we announced the exclusive Vera Wang LOVE bridal jewelry collection. The collection, which will be launched in 500 stores in October, will offer a variety of beautiful engagement rings, wedding bands and solitaire bridal jewelry. We'll support the launch with a fully integrated marketing campaign that will include television, print, online and in-store advertising. Vera Wang is a world-class brand, and we believe that the partnership with Vera will build on both of our strengths.

Yesterday, we announced our second exciting brand partnership with Jessica Simpson. Jessica has designed an exclusive collection of diamond fashion jewelry that will also debut on October. Jessica personifies the girl next door and Women's Wear Daily coined the phrase, "fashion's first billion-dollar baby," in describing a fashion empire that includes apparel, shoes, handbags, fragrances and more. She's brought her design sensibility to an exclusive line of pendants, earrings, rings and bracelets that will be available in 400 Zales, Peoples and Mappins stores. Our marketing campaign, which includes television, in-store and print, will also tap into the thousands of fans, who follow Jessica on Facebook and Twitter.

With Vera Wang and Jessica Simpson, we've anchored the most critical parts of our business, wedding and diamond fashion with 2 enormously successful brands. We welcome Vera and Jessica to the Zale family brands.

The work that we've done on the core assortment has also allowed us to test a variety of new merchandising initiatives that are competing for space in our cases. One such initiative is charm bracelets. When we were asked last year about this category, I said that we were testing it, and indeed we were, beginning with the Chamilia brand in Mappins last November. We've also tested the Persona brand in Zales and Outlet. The results have been very good, and Chamilia was rolled at all Mappin stores in April, while Persona will be at 900 Zales, Gordon's, Peoples and Outlet stores for holiday. Additionally, we have charm bracelets in 375 of our Piercing Pagoda kiosks. We are particularly excited about the terrific partnership that we have with Persona. The operating price point and margin characteristics of this category should add nice pluses for our business in fiscal '12.

Offering the right price value proposition to our guests has never been more important. Throughout the past year, we've worked diligently to offer a range of products that are affordable, offer great quality and have high emotional content. With the increases in commodity costs that Matt mentioned, it's critical that we're thoughtful about passing along price increases to our guests. Our testing has and will continue to give us detailed analysis and insight about pricing sensitivities.

Additionally, we've been careful to offer opening price points in every category so that the guests can continue to celebrate the milestones in their lives with the affordable luxury that they expect from us.

Finally, the new credit offering that Matt mentioned will provide another important payment option for high-consideration purchases.

In the area of marketing, we've also made important progress on our online bridal continuity plan, which is augmented by 2 seasonal bridal catalogs. And it underpins the results that we've had in our wedding categories.

On Mother's Day, we began our exploration into social media with our Facebook campaign, and our television advertising continues to evolve in creative ways that resonates with our guests. The Diamond Store message has been well received, and we continue to aspire to live up to that promise.

Part of being the Diamond Store is having talented, knowledgeable jewelry consultants in our stores. We began the year with 15% of our full time jewelry consultants certified by the Diamond Council of America, and we're now with 48% for the chain with over 80% in Outlet in Canada.

Our commitment to invest in our teams doesn't stop there. We have made and will continue to make critical investments in our field teams and strategic investments in our store support center. For instance, we've added people in merchandising, marketing and merchandise planning that support our initiatives for our Canadian brands and for Outlet.

During year 1 of our turnaround plan, we've made progress in creating a path of profitability, and we're focused and engaged on the hard work that needs to be done in order to get there. The uncertainty of the economy, commodity cost increase and decline in consumer confidence doesn't make our work any easier, but our business is stronger, and we're approaching this year with an even greater determination and focus. Our continuous commitment to delivering great guest experiences in all of our brands is unwavering.

Before I take questions, I'd like to thank our 13,000 associates for all that they do to make Zales brands a special place to work and shop.

Now we'll take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Rick Patel with Bank of America Merrill Lynch.

Rick Patel - BofA Merrill Lynch

Just a few questions on your upcoming brand launches, Vera Wang and Jessica Simpson. First, how big will this assortment be in terms of SKUs versus some of the other brands in the store? Second, what price points are you looking to have within each brand? And just lastly, which products or lines will you be de-emphasizing in order to make room for these new products?

Theo Killion

First of all, it gives me an opportunity to talk in a little bit more depth about these 2 important partnerships. First, let me thank the merchant team and the quality teams, who have done a great job of pulling this all together and working with the Vera Wang team and the Jessica Simpson team. Let me first talk about Jessica Simpson. The collection will be approximately 65 SKUs. It will be in diamond fashion with silver, and the price points will be from $79 to roughly $1000. The 400 doors will be Zales, Peoples and Mappins; 255 Zales stores, 80 Peoples and 65 Mappins. The launch will be around mid-October and be separated with terrific elements, and as I said, a full marketing campaign. The Vera line will be somewhere between 40 and 60 SKUs. It'll have bridal solitaire plus ladies' bands. And the price points range from about $650 up to as high as $17,000; will be in 450 Zales stores and 50 Peoples stores. And again that will also launch around mid-October.

Rick Patel - BofA Merrill Lynch

Can you talk a little bit about the level of marketing to support these brands? Should we be expecting a big uptick versus last year? And will you be incurring all those costs or will your partners also share in the costs?

Theo Killion

What I will say is that we will be spending more marketing dollars year-over-year. We will have terrific marketing campaigns for both Vera and Jessica. But the details, for obvious reasons, we won't be sharing on the call.

Rick Patel - BofA Merrill Lynch

Great. And then just if I can ask 1 last question just in terms of the economics of these brands. Can you just give us some color on what the royalty that you'll be paying will be like? And if you can't give specific numbers, just an idea of just how the merchandise margins for those brands compare to the rest of the assortment?

Matthew Appel

Sure, Rick. This is Matt. As you would understand, the financial terms associated with these exciting new launches are confidential. However, to answer your second part of your question, the merchandise margins are targeted to be slightly higher than comparable merchandise in the same categories. And this would be after absorbing, of course, any cost related to that product. So we expect slightly larger -- higher margin performance out of these products.

Operator

Your next question comes from the line of Jeff Stein with Ticonderoga Securities.

Jeffrey Stein - Ticonderoga Securities LLC

How about the incremental inventory investment to support the launch of your 2 new brands?

Matthew Appel

We don't disclose how we're going to finance that, Jeff. We're not going to make any forecast of that. But we have more than sufficient liquidity to launch these brands. And we're -- so there's no issues whatsoever.

Jeffrey Stein - Ticonderoga Securities LLC

I'm not -- Matt, maybe you're misunderstanding. I'm not talking about how it's going to be financed. But looking at the additional working capital investment that will be necessary -- I guess someone earlier asked the question about, is this going to replace something else? So I'm wondering is this incremental inventory that's going in or something else coming up?

Matthew Appel

No, it's -- it'll be offset by things that are coming out. There won't be any substantial increase in the carrying value of our inventory for the foreseeable future as a result of these programs.

Theo Killion

I think it's important to kind of, once again, talk about the fact that over the last 18 months, we have been focused on getting our core assortment back to 80%. And what that implies is that, that 80% is a collection of merchandise that has predictable margins, has great turns and that we've made room for by getting rid of over the last year and a half of unproductive inventory. We've talked about that on some of our past calls. We've made significant progress in getting rid of all of the unproductive inventory so that when Vera and Jessica debut, they won't have a markedly different impact on the total inventory.

Jeffrey Stein - Ticonderoga Securities LLC

Roughly at this point, what percent of your inventory would you consider to be unproductive or obsolete compared to where you were a year ago?

Matthew Appel

Well we don't consider anything to be obsolete particularly in this commodity cost environment, Jeff. But we are at about 80% core, as Theo said, and we were 60% approximately a year ago. And if you recall, Jeff, we articulated a goal of 80% to 85% as the core target, and we've achieved that. And so there'll always be a 15% to 20% of the inventory that we're either selling -- selling down or clearing, and that's very healthy for a business like ours.

Jeffrey Stein - Ticonderoga Securities LLC

Okay, great. And a couple of financial questions, Matt. Wondering can you give us any insight to what kind of LIFO accrual you might expect to book in the current fiscal year on a quarterly basis, at least, versus the prior year.

Matthew Appel

Sure. We're not able to provide guidance on this principally because, A, we don't provide broad P&L guidance. But secondarily because I don't have any ability to forecast what's really going to happen in -- to our replenishment costs throughout the year. So diamond costs, gold, silver, certainly surprised everyone in the industry in our fiscal year 2011. And I don't know what fiscal 2012 holds, but -- so I don't have the ability to tell you what impact that might have.

Jeffrey Stein - Ticonderoga Securities LLC

Looking at your SG&A line. Now for the first several quarters, you're going to be operating a moderately fewer number of stores than you were the prior year. So if we look at the SG&A line, can you give us any thoughts in terms of what kind of dollar growth we might be looking at year-on-year?

Matthew Appel

Well Theo's already spoken to marketing, so I'll leave that alone. I think with respect to the rest of the SG&A, I think you understand the store count, Jeff, so I'll also leave that kind of variable expectation alone. Our focus has been on spending SG&A dollars that drive sales and drive margin. And so anything we spend will be productive. It will be on the stores, it will be on people. It will be on driving better productivity with our merchandise. And as you can see, even though our SG&A was up, $7 million quarter-over-quarter on a percentage basis and understanding the base from where we came with all the drastic reductions that took place over the last few years, I think it's quite nominal.

Jeffrey Stein - Ticonderoga Securities LLC

Okay. And final question for you, Matt. Any -- do you see any opportunity to do anything with the senior notes that you have on your balance sheet, at that -- you have the 15% coupon. Any opportunity to recapitalize the balance sheet? Because that's a fairly significant fixed cost for you guys to cover, and I think it's probably a big impediment to getting to breakeven?

Matthew Appel

Jeff, I think that the opportunity to recapitalize the balance sheet, as you put it, is really very dependent on us achieving our expectations, our plans for this coming holiday. And so because so much of our business is concentrated around the holiday season, we are heads down on completing the execution. When we come up on the other side of that, we will also look at how the market's performing. As you understand, there's been extreme volatility in the financing markets over the last couple of months. We're always studying this and thinking about it. But the reasonable expectation is that we couldn't begin to execute anything until we post our second consecutive holiday if the market considers to be respectable and meets expectations.

Operator

Your next question comes from the line of David Wu with Telsey Advisory Group.

David Wu - Global Crown

First question, we've obviously heard sustained sales momentum in August from others in the industry. Are you seeing similar trends as well?

Matthew Appel

David, we don't disclose monthly trends except when there's one of the holidays that occur in it, like Mother's Day or Valentine's Day. So we won't speak about trends in our first fiscal quarter of 2012 until November.

David Wu - Global Crown

Okay, great. In terms of the price increases that were implemented in July, can you talk about how that's been -- if that's been accepted by customers or if you've seen any sort of resistance to that?

Matthew Appel

We think anytime is a price increase, David. There's a -- there will be a shift in terms of unit sales as well as margin growth. But our focus has been in our testing, in our very rigorous testing that I talked about, and the testing that continues because price testing is a year-round business, especially in this volatile markets. We were very pleased with the margin comp performance that resulted from the test as well as what's occurred since then. And that is and will remain our primary focus.

David Wu - Global Crown

Great. And can you provide more color on the new U.S. credit program with Monterey Financial Services? Perhaps talk about how your scorecard or approval criteria differs from that of Citi's?

Matthew Appel

Sure. First, for one of our guests to be considered under the new program that Monterey is -- the first participant in it, there'll be other participants in the future. They first have to be declined by Citi. Citi has the first crack contractually at every guest that want to finance using our proprietary -- our principal proprietary product. Monterey, without disclosing how they go about this, generally speaking, will be financing customers, who have slightly lower FICO scores or for some other reason, may not have satisfied Citi's criteria. It's seamless to our guests. It happens at our POS and technology. And of course, we would certainly disclose to our guest, who's financing the transaction. But it's a very -- it's designed to be an operating as a seamless process that we've tested extensively in one of our regions and just this week rolled out nationally.

Theo Killion

There's tremendous enthusiasm by our field teams, who are really looking forward to the opportunity of having other opportunities to get people into a piece of jewelry. So great excitement across the country.

David Wu - Global Crown

And how much incremental business do you think this could drive?

Matthew Appel

We think it will drive incremental business. But consistent with the way we talk about other things, we'll deliver it and then we'll talk about it.

David Wu - Global Crown

And just to clarify, so you won't be taking on any liability from this agreement on your balance sheet? Is that correct?

Matthew Appel

No. It's a nonrecourse program of the Citi.

David Wu - Global Crown

Okay, okay, excellent. And then just lastly, in terms of the gross margin target, obviously you'll be facing more pressure from commodity costs in the coming year. But I just want to know if the offsets to that will primarily be the further price increases potentially as well as the potential for lower markdowns or higher warranty sales? Is there anything that I'm missing there?

Matthew Appel

Sure, let me elaborate. I don't think you're missing anything, David. Number 1, I think we've done a spectacular job of navigating the commodity cost environment with the margin that we posted for this quarter. And if you recall, our price -- the bulk of our price increases were effective only for part of July. And so in the future quarters, you would see obviously a full quarter impact. We continue to test price increases. We'll test them always, and we're testing them now. And based on what those tests tell us, what the competition signals, we'll consider whether additional price increases, either in the form of ticket prices or in some other fashion needs to take place. We're very focused on the out-the-door price. And you won't always see -- it's margin performances net out the door.

Theo Killion

And importantly, there'll be lots of options in our stores for opening price points for accessible luxury: that Jessica line starting at $80; the promotions that we're doing with our charm bracelets, which is a new business for us in our brand, should give all of our guests lots of opportunity to continue to shop in our business

Operator

Your last question comes from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

The discussion you just had about the Jessica line and the opening price point there and on charm bracelets, as part of my question. I know that you've had your increased prices. But I'm wondering if you could share some of your price point analysis with us? Are your opening price points allowing you to have a lower price point now than you've had previously? And what happens on the segmentation -- as you look at the price point analysis segment, is there more at the best or better level? Is there less at the high-end level? And how does that compare to your competitors? I also was wondering if you could talk a little bit about your outlook for brand marketing for the holiday season? For all of your marketing for the holiday season, would we see an uptick and with the venue change? In other words, might there be more TV, might there be more social media? That would be interesting for me. And lastly, should we be thinking about SG&A growth that would trend at a lower level than top line growth or could it be consistent with top line growth?

Matthew Appel

I'm not quite sure where to begin, so let me pick the place. The -- our performance over the last quarter, and I'm sure you heard this on the call, was very positive in terms of average transaction value. We were very pleased with the 7% increase, considering that, again, price increases were in -- the bulk of the price increases were only in place for several weeks during July. And so I think these bodes well for what we might see going forward, though I'm making no predictions about the future. If -- I'm going to go to SG&A. I think we've answered those questions, but let me reemphasize that we're going to be very disciplined, and we're going to remain very disciplined and very thoughtful about where any incremental SG&A dollars go. They're either going to go to enhance the marketing programs that were greatly improved last year to support the new programs that Theo's talked about; or to really, to provide better intelligence around merchandise, so that our assortments can be even better refined; and of course, to compensate the field both in terms of headcount and in terms of incentives for the great work that they do.

Theo Killion

From a marketing standpoint, Janet, we don't believe we will ever be the loudest voice. What we want to achieve is that when we speak, people listen. So the association with Vera and Jessica means that we can be marketing efficient by leveraging off of the momentum that they each have as famous designers. We think that will be a benefit to us, and it will be an accelerator effect to everything that we do. Online will continue to be important to us at it has been in the past. We're doing a lot of interesting things this year with Outlet and in our Canadian brands. And on an overall basis, while there'll be a marketing increase, our focus will always be on advertising efficiency.

Janet Kloppenburg - JJK Research

But in terms of an analyst from the outside planning SG&A, my -- summing up what you've said, I guess we should be thinking that you would be coming in at a lower rate than top line growth. And then my question on price point, basically, has to do with good, better, best. Are there more prices at the lower level, less at the higher level? And how does that compare to your competitors?

Matthew Appel

Janet, first, I want to comment on SG&A even though you made a statement and you didn't ask a question. I don't know -- we're not going to provide any expectations other than what we've said for where SG&A levels go. Clearly, as we support marketing the way that we've discussed here, it's reasonable to expect that, that might cost more. But beyond that, we're really not going to predict the leverage. We firmly believe, unlike our predecessors, that you first deliver those results and then you talk about them. And so we are -- we want to exceed expectations in every facet of our business, most importantly with our guests. And we're going to keep it that way.

Theo Killion

And it's just similar answer for the good, better, best. For competitive reasons, we believe that talking about how our price tiers lay out is not in our best interest.

Operator

You do have a follow-up question from the line of Jeff Stein with Ticonderoga Securities.

Jeffrey Stein - Ticonderoga Securities LLC

Matt, I understand you don't want to comment on forward-looking marketing. But can you tell us what you've spent on marketing this past fiscal year? And also, wondering if you can discuss the attach rate that you're seeing from warranty sales?

Matthew Appel

Sure. On marketing, we spent a number that was just south of $80 million in terms of advertising, and that was about equal to the prior year. But let me point out the following: first, the distribution of that spend was greatly refined. We spent a good deal more in the second half to support Mother's Day and Valentine's Day than we did in 2010. And we also believe that the spend was far more effective than it was in the prior year in terms of the venues in which it appeared and based on the results that we saw in terms of rating points, et cetera.

Jeffrey Stein - Ticonderoga Securities LLC

And your attach rate on warranties?

Matthew Appel

Our warranty attach rates are about the same as the prior year. But if you look at the rates, which we don't necessarily disclosed, you would -- here's what you would see. That, first off, we've extended the warranty to much more product than we have in the past. And so to maintain attachment rates is fairly significant. In addition, we had 2 price increases in warranty last year. And because of that, we sold approximately $20 million more lifetime warranty than we had in the previous year. And I'm excluding the 1-year kiosk-oriented program, which also showed a dramatic increase year-over-year. We had $20 million more in cash sales from our lifetime product in '11 than we did in '10.

Jeffrey Stein - Ticonderoga Securities LLC

And you defer those revenues and you amortize them, correct?

Matthew Appel

Yes, currently they are recognized over a 5-year period on a straight-line basis. And the proportional recognition of these products -- of these sales can only occur when you have been a long enough experience curve to base those -- to base that recognition on. So a straight line at this point in time.

Jeffrey Stein - Ticonderoga Securities LLC

Got it, got it. How about your online sales this past year? What kind of growth did you see? And can you tell us what that number was?

Theo Killion

We won't give you the specific number, but what we will say is we had double-digit comps on top of double-digit comps.

Operator

Ladies and gentlemen, we have reached the allotted time for Q&A today. I will now turn the call back over to management for closing comments.

Theo Killion

I want to thank everyone for participating in today's call and for your continued support. Over the next couple of months, both Matt and Roxane will be at investor conferences and will be available to tell our story in greater detail. And we'll be together again in November for our quarterly earnings call. So thank you.

Operator

Ladies and gentlemen, that concludes the Zale Corporation Fourth Quarter Fiscal 2011 Results Conference Call. We appreciate your time. You may now disconnect.

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